Reference no: EM131075172
Intermediate Accounting II
For this exam, omit all general journal entry explanations. If no entry is required then post an entry line that states "no enty". Ensure to include correct dollar signs, underlines & double underlines, when required. Ensure to use proper financial document format details such as blank lines where required. Unless otherwise noted, all fiscal years end on December 31.
Question 1:
On January 1, 2015, Bravo issued $400,000 of 6% bonds. The bonds were issued at 98 and pay interest semiannually on July 1 and December 31 each year.
On September 1, 2015, Bravo issued for $530,000 cash, 500 7% five-year nonconvertible bonds dated September 1, 2015. Each $1,000 bond had a detachable stock purchase warrant to purchase 20 shares of $3 par value stock for $10 per share. Immediately after issuance, the warrants had a market value of $45,000, and the bonds were selling at 102 without the warrant.
On January 1, 2011, Bravo issued 100 ten-year convertible bonds. Each $1,000 bond is convertible into 20 shares of Bravo's $10 par value common stock. The bonds were issued at 105 when the common stock traded for $40 per share. The bonds pay interest annually. The conversion features of the bond are not beneficial. On October 1, 2015, half of the bonds were tendered for conversion when the common stock was trading at $62 per share. Bravo uses the book value method to account for the conversion. At the time of conversion, the bonds had a carrying value of $104,300. Bravo does not elect the fair value option for reporting these financial liabilities.
Prepare the journal entries for the bond transactions during 2015.
1. January 1, 2015 Issue bonds
2. September 1, 2015 Issue bonds with detachable warrants
3. October 1, 2015 Conversion of bonds
Question 2:
Bravo Co.'s stockholders' equity account balances at December 31, year 5, were as follows:
Common Stock
$800,000
Additional Paid in Capital
1,600,000
Retained Earnings
1,845,000
The following 2016 transactions and other information relate to the stockholders' equity accounts:
> Bravo had 400,000 authorized shares of $5 par common stock, of which 160,000 shares were issued and outstanding.
> On March 5, 2016, Bravo acquired 5,000 shares of its common stock for $10 per share to hold as treasury stock.
> The shares were originally issued at $15 per share. Bravo uses the cost method to account for treasury stock. Treasury stock is permitted in Bravo's state of incorporation.
> On July 15, 2016, Bravo declared and distributed a property dividend of inventory. The inventory had a $75,000 carrying value and a $60,000 fair market value.
> On January 2, 2011, Bravo granted stock options to employees to purchase 20,000 shares of Bravo's common stock at $18 per share, which was the market price on that date. The options may be exercised within a three-year period beginning January 2, 2016. The measurement date is the same as the grant date.
On October 1, 2016, employees exercised all 20,000 options when the market value of the stock was $25 per share. Bravo issued new shares to settle the transaction. The stock options were accounted for in accordance with the intrinsic value method, which was in effect at the time.
> Bravo's net income for 2016 was $240,000.
Prepare journal entries for the following transactions in 2016.
1. Treasury stock purchased on March 5, 2016
2. Declaration and distribution of a property dividend on July 15, 2016
3. Issue of common stock on October 1, 2016
Question 3:
Brovo Construction Company uses the percentage-of-completion method of accounting. In 2015, Brovo began work under a contract with a contract price of $1,500,000. Other details follow:
2015 2016
Cost incurred during the year
$980,000 $1,375,000
Estimated Cost to complete, as of December 31
Billings to date
800,000 1,500,000
Collections to date
250,000 1,500,000
Prepare all required general journal entries for 2015. (Use 12/31/15 as transaction dates.)
Question 4:
Warren Buffet, an investor in Alpha Co., asked you for advice on the propriety of Alpha's financial reporting for two of its investments. Assume that Alpha does not elect the fair value option for reporting its financial assets and liabilities. You obtained the following information related to the investments from Alpha's December 31, 2015 financial statements:
> 20% ownership interest in Beta Co., represented by 200,000 shares of outstanding common stock purchased on January 2, 2015, for $600,000.
> 20% ownership interest in Charlie Co., represented by 20,000 shares of outstanding common stock purchased on January 2, 2015, for $300,000.
> On January 2, 2015, the carrying values of the acquired shares of both investments equaled their purchase price.
> Beta reported earnings of $400,000 for the year ended December 31, 2015, and declared and paid dividends of $100,000 on 12/15/2015.
> Charlie reported earnings of $350,000 for the year ended December 31, 2015, and declared and paid dividends of $60,000 on 12/15/2015.
> On December 31, 2015, Beta's and Charlie's common stock were trading over-the-counter at $18 and $20 per share, respectively.
> The investment in Charlie is accounted for using the equity method.
> The investment in Beta is accounted for as available-for-sale securities.
You recalculated the amounts reported in Alpha's December 31, 2015 financial statements, and determined that they were correct. Stressing that the information available in the financial statements was limited, you advised Warren that, assuming Alpha properly applied generally accepted accounting principles, Alpha may have appropriately used two different methods to account for its investments in Beta and Charlie, even though the investments represent equal ownership interests.
Prepare the general journal entries for the following:
1. Alpha's investment in Charlie Co. on January 2, 2015.
2. Dividends received from Charlie in 2015.
3. Required for Charlie's reported income for the year ending on December 31, 2015.
4. Alpha's investment in Beta Co. on January 2, 2015.
5. Dividends received from Beta in 2015.
6. Required for Beta's reported income for the year ending on December 31, 2015.
Question 5:
The following is a condensed trial balance of Bravo Co., a publicly held company, after adjustments for income tax expense.
Bravo Co.
Condensed Trial Balance
Accounts
12/31/2015
Balances Dr.
(Cr.)
Cash $484,000 $817,000
Accounts receivable, net 670,000 610,000
Property, plant, and equipment 1,070,000 995,000
Accumulated depreciation (345,000) (280,000)
Dividends payable (25,000) (10,000)
Income taxes payable (60,000) (150,000)
Deferred income tax liability (63,000) (42,000)
Bonds payable (500,000) (1,000,000)
Unamortized premium on bonds (71,000) (150,000)
Common stock (350,000) (150,000)
Additional paid-in capital (430,000) (375,000)
Retained earnings (185,000) (265,000)
Sales (2,420,000)
Cost of sales 1,863,000
Selling and administrative expenses 220,000
Interest income (14,000)
Interest expense 46,000
Depreciation 88,000
Loss on sale of equipment 7,000
Gain on extinguishment of bonds (90,000)
Income tax expense 105,000 _________
Totals $0 $0
12/31/2014
Balances
Dr. (Cr.)
Additional information:
> During 2015 equipment with an original cost of $50,000 was sold for cash, and equipment costing $125,000 was purchased.
> On January 1, 2015, bonds with a par value of $500,000 and related premium of $75,000 were redeemed. The $1,000 face value, 10% par bonds had been issued on January 1, 2006 to yield 8%. Interest is payable annually every December 31 through 2025.
> Bravo's tax payments during 2015 were debited to Income Taxes Payable. Bravo recorded a deferred income tax liability of $42,000 based on temporary differences of $120,000 and an enacted tax rate of 35% at December 31, 2014; prior to 2014 there were no temporary differences. Bravo's 2015 financial statement income before income taxes was greater than its 2015 taxable income, due entirely to temporary differences, by $60,000. Bravo's cumulative net taxable temporary differences at December 31, 2015, were $180,000.
Bravo's enacted tax rate for the current and future years is 35%.
> 60,000 shares of common stock, $2.50 par, were outstanding on December 31, 2014.
> Bravo issued an additional 80,000 shares on April 1, 2015.
> There were no changes to retained earnings other than dividends declared.
Prepare a statement of cash flows using the indirect method.